When to go long & when to go short

A few days ago I told you I am going to share my strategy with you, and I’m in the process… I started with this article, and then I wrote this one.

I have received a few emails asking my about the entry rules that I use… but don’t get impatient, I’ll get there… in fact, my next article about the strategy I think will be about my entry rules…

(If I don’t think about something else)

So we’ll get there… I just think that its very important for you understand a few things about the market and about the methodology before we actually go over it!

But I promise you something, by the time we get to the entries, you’ll have more answers than questions.

Sounds good?

Market Condition

What I’m going to write about today, answers one simple but probably the most important question about trading:

What am I going to do today with this currency pair or stock or commodity?

If you think about the possibilities here… you end up with different possible answers:

I will go long

I will go short

I will wait for the market to do something before I do something else

I have no idea of what the market is doing, therefore I wont trade it

If you think the market will move up, of course you are going to look for long opportunities, likewise if the market is likely to continue its way down, you’ll keep looking for short opportunities.

By the same token, if you’d rather wait for the market to do something before taking any trade, you just wait until that “something” happens.

And obviously, if you have no idea of what the market is doing, you know you are better off not trading it.

So you need to know what the market is likely to do, so you can make your trading plan and adapt to the way the market is currently trading.

That way, you will always be trading in the direction of the market condition and let me tell you something, if you always trade in the direction of the market condition, no matter what strategy you use, results will come (sooner or later).

So, what is this “Market Condition”… This is how I define it:

The market condition is the way the market reacts to the long term support and resistance levels.

From one of my previous articles you know that one of the main principles of price action is that the market (most of the time) moves from one level to the other.

The way we can explain those movements, from one level to the other, is what I call Market condition.

Its important to remember that for now, we are talking about long term charts (4H, 1D and 1W). This is just the analysis that we do to determine if we are going to trade one instrument or not (our entry strategy, which we’ll discuss later on, it all about the short term charts).

Ok, so, we have 4 types of market condition:

Bullish Market Condition (MC)

Bearish MC

At an important level

No clear market condition

Bullish Market Condition

When ever the market is trading in bullish MC, I know that the market is likely to continue its way up, and therefore I will only look for long opportunities (why on earth would I go short if I know the market is likely to continue its way up).

There are two ways in which we can get a bullish condition: When the market gets rejected from and important Long Term (LT) support level and when the market breaks through an important LT resistance level.

So these are the two ways in which you can get a bullish condition.

Its simple isn’t it?

Unfortunately, sometimes real charts aren’t as easy as that image, so lets take a look at some images for both scenarios.

In the chart above, its clear that the market was rejected from an important support level, therefore it is trading in a bullish condition. And it will remain bullish (likely to continue moving up), until the market reaches the next LT resistance level.

It is now time to start looking for long opportunities in the short term charts.

In this case, the market broke through an important LT resistance level, triggering a bullish condition. And again, the market is likely to continue to move up, at least until it reaches its next LT resistance level.

Here again, I’ll be looking only for long opportunities (I will ignore all short signals).

Are you with me?

Bearish Market Condition

When the market trades in a bearish condition, I know that it is likely to continue to move down, therefore I’ll only look for short opportunities (and ignore every long signal since I know it is likely to continue its way down).

And again, there are two ways in which we can get a bearish condition: When the market gets rejected from an important LT resistance level and when then market breaks through an important LT support level.

And again, those are the two ways in which you can get a bearish condition.

Now lets take a look at some real life examples.

In the chart above, the market was rejected from an important resistance level, its half way down, but we still have enough room to take our trade.

Since it got rejected from an important resistance level, I know it is likely to continue its way down, therefore I’ll keep looking for short opportunities at least until it reaches the next LT support level.

In this case, the market broke through an important support level, when the market broke that level, it triggered a bearish condition, which means that we are going to keep looking for short opportunities.

And I will ignore every long signal that might appear.

At an important level Market Condition

This one is the most tricky market condition… so please pay attention.

This market condition refers to when the market trades at or near an important LT level.

At this point, we don’t know whether the market is going to get rejected from there, or break through that important level.

But hey, here is a little secret, we don’t need to know! We don’t need a crystal ball…

We just need to patiently wait for the market to make up its mind, let it make its first move, then we’ll follow.

That’s it! There should be no guessing involved, its all about following what the market is doing.

I mentioned that this one was probably the most tricky market condition, and the reason why I think that its because sometimes we need to be very very patient, and wait for the market to make up its mind.

Sometimes it might take a few hours, but it can take as long as a few months.

So what’s the procedure here?

Alright, I thought you might asked that question… so I prepared these two charts for you:

When you see that chart, what’s the first thing that pops up in your mind?

It looks like it was rejected from an important resistance level right?

But thats not the case, when we take a closer look at that range, for instance, in the short term chart, we might find something different… take a look at it:

In this chart however, its clear that the market is still trading around that level.

So here is how it works…

When the market trades near an important LT level, most of the time, it will range in the ST charts, so we need to take a look at the short term chart, mark our range, and define our trading plan:

If the market breaks through the upper ST resistance level, it will trigger a bullish condition (bullish condition, not a long trade).

If the market breaks through the lower ST support level, it will trigger a bearish condition (bearish condition, not a short trade)

For as long a the market keeps trading in between that range, I’ll stay on the sidelines.

And that’s it, now you have a plan, you know what does the market need to do, so that you can start looking for trade opportunities.

When you have a plan like this one, you are more likely to trade with discipline, which is what we all need to trade with consistent results.

Crystal clear?

No clear market condition

This one is the last type of market condition, as its name implies, its got no clear:

Support & resistance levels

Market swings

And its better to stay away from it…

If you dont have clear S&R levels or clear swings, you’ll never know what the market is likely to do, it will be like random walk… and you dont want to get involved when the market moves like that…

So at the end, its always about finding the right instruments to trade, the instruments with the right market condition, and always trading in the same direction.

If you want to further explore these concepts, I recommend you to do two things: